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Chapter 14 Outline Fall 11

Chapter 14 Outline Fall 11 - ACCT 403 CHAPTER 14 FALL 2011...

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ACCT 403 CHAPTER 14 – FALL 2011 BUSINESS ENTITIES - OPERATIONS AND DISTRIBUTIONS Part 1 – Operations I. Sole Proprietorships A. Since we have extensively covered sole proprietorships in other chapters, we will not cover them in this chapter (pages 2-4). II. Partnerships A. Reporting Requirements 1. The partnership reports its “ordinary” income and deductions on Form 1065. a. See page C-14 for Form 1065. 2. The term “ordinary” does not have the same meaning as when it was used in determining the gain or loss from the sale of property (i.e., capital gain, trade or business gain, and ordinary income). a. Ordinary in this context means there is no special tax treatment of the income and deduction items if received by a corporate taxpayer or an individual taxpayer. . b. Any item that could affect the partner’s tax liability if the item is separately reported, must be separately reported. c. Examples of items that require separate reporting include the following: 1. Tax exempt income. 2. Investment income. 3. Capital gains and losses (short-term and long-term). 4. Trade or business gain and losses. 5. Dividend income. 6. Rental income. 7. Nondeductible expenses. 8. Charitable contributions. d. Also see page 4 for a list of similar items. e. Example 2, page 5. 3. By law a partner cannot be an employee. If she is compensated for services, the payments are characterized as guaranteed payments. a. Guaranteed payments are deducible by the partnership and reported by the partner as income. B. Income Tax Consequences to Partners. 1. A partner’s share of income is reported on Schedule K-1 (see page C-19). 2. A partner who is an individual reports his share of “ordinary” income on Schedule E.
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2 3. Items which are reported separately on Schedule K-1 are reported on the applicable schedules (dividends are reported on Schedule B, capital gains and losses are reported on Schedule D, etc.). 4. A partner’s share of a partnership NOL also passes through but it’s deductibility is limited to the following three limitations: a. Partner’s basis in the partnership interest. 1. Example 3, page 6. b. The amount that the partner is “at-risk” in the partnership (activity). 1. Not responsible for definition – excludes share of nonrecourse debt. c. Passive activity loss rules if the share of loss is from a passive activity. 1. Not responsible for Examples 6 - 8 on page 7 as this was covered on Exam 2. C. Partner-Partnership Transactions 1. Generally, a partner can engage in a transaction (sale, contribution, loan, rent, service, etc.) and the transaction will be respected. 2.
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Chapter 14 Outline Fall 11 - ACCT 403 CHAPTER 14 FALL 2011...

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